BANK OF NEW ZEALAND

Evening Star, Issue 21747, 15 June 1934, Page 6

BANK OF NEW ZEALAND

THE AHNUAL MEETING CHAIRMAN'S REVIEW OF YEAR'S OPERATIONS POINTED COMMENT OH EXCHANGE AND THE RESERVE BANK The annual meeting of the shareholders of the Bank of New Zealand was held at Wellington this morning, when Sir Harold Beauchamp (chairman of directors) covered fully tho year’s operations in moving the adoption of the report and balance-sheet. He referred also to matters of general interest in dominion affairs, and these references are reported elsewhere under separate headings. The Chairman stated (inter alia) : Capital and reserve fund remain the: same ns last year. On July 19 next the 4 per cent, guaranteed stock, amounting to £529,988 10s 6d will fall due, and will be repaid by the bank from its London resources. Notes in circulation show a decrease of £79,598 The weekly average of the circulation for the year was £3,735,000. Deposits have increased by £1,754,765. The greater portion of the increase is in fixed deposits. Government balances are less by £593,609. The deposits of all the banks have, shown a considerable increase during the year, and reference to this matter is made in another part of my report. Profit and loss shows a decrease of £21,233. Coin, cash balances, and deposits with bank ers show a decrease of £706,136. Money at call and short notice, Government securities, and other securities in London have decreased by £2,103,050. Bills receivable in London and transit shows an increase . of £852,359, due mainly to the higher prices obtained for wool during the past season. New Zealand Government securities held in the dominion and Australia show an increase of £5,261,386, due mainly to an increased bolding of Treasury bills. Australian Government securities show an increase of £970,481. Advances and bills discounted are less by £2,709,527, but it should be mentioned that loans to the State against discharged soldiers’ settlement mortgages are included under this heading, otherwise a much greater reduction would be shown. THE DIVIDEND. The dividend on all classes of shares will be payable in Wellington to-mor-row, and at our various branches on receipt of advice. 1 quite anticipate that those . not directly interested in the welfare of tho bank may question the policy of the board in deciding to recommend the payment of a final dividend of 5 per cent., making 10 percent. for the past financial year. I would, however, point out that this dividend has been earned on capital, plus reserves, the latter being created m prosperous times. It is sometimes overlooked that a considerable number of our shareholders have paid a substantial premium in recent years lor their holdings, and on a dividend ot 10 per cent, they are getting not more than from 3 to 4 per cent, on their investment Indeed, on present quota tions—viz., £2 12s cum dividend, the yield is just about £3.84 per cent. BANKING POSITION. The banking returns for the March quarter of all banks operating in -New Zealand revealed an increase in the free deposits or current account balances of more than £4,000,000 for the year, bringing the total to over £2l, 000,000. The time or fixed deposits have continued to expand, which is inevitable in a period of commercial depression. , • . The total ot the deposits shows an abnormal increase. Un the other hand, the advances and discounts have decreased for the year by neariy £7,OOO,UUu, leaving the exceptionally large excess of depositsover advances ot more than £19,1)00,000. The decline of bank advances by approximately £7,000,000, as compared with last year, has been materially con tributed to by the raising of the exchange i ate on London from 1U per cent, to 25 per cent. interest rates. In July of last year fixed deposit rates were again reduced. Current rates are:—Three months, 2 per cent.; six months, 2} per cent.; 12 months, 2i per cent.,; 24 months, 3 per cent. The minimum rate for overdrafts on first-class business is 5 per cent. It has to be borne in mind that in fixing overdraft rates consideration, has to be given to the rates being paid on fixed deposits (at the present time 4 per cent, deposits are still running), and also to the fact that' banks are taxed not on profits, but on an assumed income arrived at by taking 30s per cent, of their total assets and liabilities in New Zealand. At the present rate of income tax this is equal to a tax of 8s 9d on every £IOO of deposits and advances. The oversea trade of the dominion for the year ended March 31 last, expressed in sterling, shows that the value of our exports increased by approximately £4,157,000 compared with last year, and imports decreased by £1,141,000. In the year just ended tho exports exceeded the imports by the very large sum of £15,926,000 sterling, or, if expressed in New Zealand currency, £19,907,000, and it is somewhat singular that this latter amount should so closely approximate to the excess of deposits over advances (£19,537,000), as shown in the banking returns for the past quarter. EXCHANGE RATE ON LONDON. You will expect me, no doubt, to make some reference to the exchange rates, the alteration of which in January, 1933, from 110 to 125 (to £IOO sterling) has been the subject of considerable controversy. The bank’s view regarding adjustment of exchange rates to meet variations in the price of produce was stated from this chair at the annual meeting in 1932 and again in 1933, and it is therefore unnecessary for me to repeat what was then said. I will merely summarise the present position. It will be recalled that the Government, believing that the most satisfactory manner of helping the primary producer in his difficulties was tirougn the exchange rate, as had been done in Australia, raised the rate from 110 to 125. At tho same time, to ensure the co-operation of tho banks, tho Government agreed to take over the surplus London funds arising from the hanks’ New Zealand business. It may be assumed that the Government and its advisers anticipated that importers and others having payments to make in London would accept the position and continue to operate normally. Such, however, has not been the case, for the belief has been widely held that the exchange rate must have some relation to the balance of trade, that the 125 rate was unwarranted according to this principle, and therefore could not bo maintained. This_ belief, based on economic teaching which is now apparently old-fashioned, has persisted in spite of Ministerial assurances. Those desirous of remitting funds from London to New Zealand have also apparently

shared this view, and the net result has been that the surplus funds taken over by the Government under the Banks' Indemnity (Exchange) Act, notwithstanding the observance by the banks of the Government's request that the transfer of capital moneys from London should not bo made, have attained a volume far beyond expectations. The uncertainty regarding maintenance of the rate, whether justified o. not, has been most unsettling, and lm.s naturally given importers and others . good deal of anxiety in the condm of their business. J. am afraid tin some of the trade which should right go to our best customer —Great Britaii —is being diverted to Australia. The Government has given an assurance that the rate will remain at its present figure until at least the end of the present produce season. The Reserve Bank will commence business on August 1, and as the determining of exchange rates is one of its functions tho continuance or otherwise rf the present rate will bo one of tho difficult problems it will have to solve. On tho one hand is tho primary producer, who has had the benefit of tho high rate for eighteen months, whoso need of assistance (with the exception of the woolgrowcr) is even greater now than formerly, and whose competitors aro still working on high exchange or depreciated currencies. On tho other hand there is the strong opposition of a .largo portion of the community, which considers tho high exchange rate an additional burden placed on the general public for tho benefit of a section of tho people. There is, further, a trade position and an accumulation of London funds which not duly do not justify a 125 rate, but which would in ordinary course call for a rate not worse than par. It has been authoritatively stated that tho adoption of high exchange rates by Australia and_ New Zealand had no bearing on Britain’s decision to impose quotas, but it is difficult to understand that tho imposition of what was virtually a substantial additional tariff on British goods passed unnoticed. It is a generally accepted principle that one can rarely have it both ways. THE RESERVE BANK,

Tho most important event in banking circles has been tho establishment of a Reserve Rank. Our view regarding the necessity for such an institution in our small dominion has already been made plain at previous annual meetings, and f do not propose to make any further comment on that aspect of tho matter. Parliament having decided that a Reserve Rank should bo established, tho Rank of New Zealand will co-operate in every way possible to servo tho interests of the dominion. The Reserve Bank is to commence operations on August 1 nest. The Government accounts, which for so many years have been kept with the Rank of New Zealand, will be transferred to the Reserve Rank, but we do not consider this will have any material effect on the earning power of this bank. The right of note issue will vest in the Reserve Rank. To redeem their existing issues the trading banks will have to purchase Reserve Rank notes.

Tho banks have also to maintain balances at the Reserve Rank equal to 7 per cent, of their free deposits and 3 per cent, of their fixed deposits. Altogether for notes and deposit the Rank of New Zealand will have to find foi payment to the Reserve Bank approximately £7,000,000. Of this amount about 1J millions will be provided by our gold holdings, and the balance by repayment of Treasury bills out of funds to be remitted from London through the Reserve Rank. It will, no doubt, occur to you that the transfer of this large amount into non-interest bearing assets will affect the profits of this bank, particularly as the greater portion is now invested in New Zealand Government Treasury Bills.

The loss of this income will certainly affect our profits, especially if the present conditions of a low level of advances and high level of fixed deposits continue, but as a substantial set-off there will be a saving of note tax (4J per cent.) and cost of maintaining our note department, which together have been, costing us over 6 per cent, on the amount 6f our notes in circulation—an expensive privilege in these times of low interest rates.

The gold held by the trading banks is to be banded over to the Reserve Bank in exchange for notes of an equivalent nominal amount. For every sovereign a Reserve Bank £1 note will bo received.

You are aware, from newspaper reports, of the banks’ strong opposition to the proposal that their gold should be taken over at practically half its market value, and you will readily understand that we regard the matter with disappointment and a strong sense of injustice. The Reserve Bank, which is to receive £1,000,000 from the Government for its General Reserve Fund, free of interest, is also to be exempt from taxation, and it will thus be in a very advantageous position as compared with the trading banks, which have paid both note tax and income tax. REASSURANCE. Mr William Watson, in seconding the motion, said: — Naturally, owing to the establishment of the Reserve Bank and your institution being deprived of the Government business and the note issue, as well as a large amount of its funds being required to be on deposit without interest while bearing heavy income tax, some of you may be under apprehension as to its future. Saving of expenses may, however, balance any loss incidental to the removal of the Government account, and it would bo decidedly difficult at the present low rates of interest to recover the costs of a note issue bearing a special tax of 4£ per cent, besides income tax and price and manipulation of the notes. Apart from these considerations, which may be termed minor in comparison, you have the great inherent strength of the bank, which at this juncture deserves some notice. Forty years ago the head office of the Bank of New Zealand was removed from London to Wellington. Arrangements were then made by which the Government at the time assisted the bank by an endorsement for which the endorsers always had ample security, and have since received in cash and appreciation of shares several times the value of the sum endorsed. To the board and stall of that day must be given the credit ot laying secure foundations, on which their successors have wisely and laboriously built so that now you have the resources and strength referred to by the chairman in connection with the dividend. After their severe lessons in the early ’nineties of last century most hanks in the British Empire, including this bank, adopted a system of small or no dividends, writing down assets and building up reserves, until they acquired the strength which has enabled them to_ reward shareholders and stand firm in” the lean years. It would not be correct to imagine that the condition and standing of this institution has been brought about by profits made in New Zealand only. I consider that, with capable directors and continuation of a staff of officers such ns the bank has now, it will hold its own through good times and had as it has done in the past forty years.